Air Transport World

The price of retribution: American Airlines' fare cuts, coming on top of restructuring, contributed to the industry's summer of big losses. (includes related article on AMR CEO Robert L. Crandall) (Industry Overview)

If only U.S. airline-industry virtue--record summer traffic stimulated by bargain fares was rewarded with record profits. Just the opposite. Second-quarter losses exceeded $500 million. The third quarter showed some improvement but still was unprofitable. The industry was headed for a third year of losses, despite traffic records in July and August. In August, three major airlines--Northwest, United and American--had load factors higher than the highest carrier in August, 1991 and two, Northwest and United, went over 80%. Industry average was 75%.

This is a far cry from expectations earlier in the year, when the previous two years' losses of $3.9 billion and $1.9 billion respectively were supposed to have been reversed. In the first four months, yields were up, with discounts comprising a smaller percentage of the total, and so was traffic, slightly in the U.S., and a lot abroad, compared with the Gulf War period.

Then came American's April fare restructuring, which was designed to inject a dose of reality into pricing. As Barbara Amster, American VP-pricing and yield management, told a course held by the International Aviation Management Training Institute, when the 1-way full coach fare coast-to-coast cost $700 and a roundtrip discount cost $398, "we were beyond the point of explaining this to customers." The 4-tier system would eliminate tail-chasing gimmicks such as corporate discounts and meeting fares, reduce first class 20-50% and coach fares 38%, increase travel flexibility, because the lower coach fares were unrestricted, and increase some discount fares, though not so much that they would discourage travel. First-class and coach fares would conform to actual prices after incentives and negotiation, and wouldn't reduce real revenue. They also might stimulate additional traffic by individual business travelers. Costs of administration would go down, American said, because a simpler structure would need fewer personnel.

Oh, and by the way, American had thought about this for a long time and suggested that the whole industry should follow its lead. …

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